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Generic Proceeding to Review Rate Treatment of Distribution System Acquisition Costs Under Performance-Based Regulation (AUC Decision 24405-D01-2019)

Link to decision summarized

Rate Treatment Review – Distribution System Acquisition

In this decision, the AUC considered the rate treatment of amounts paid by a distribution utility in Alberta for acquiring distribution systems owned by rural electrification associations (“REAs”), gas co-operatives and municipalities under the 2018-2022 performance-based regulation (“PBR”) plan. The AUC also considered the treatment of such costs for municipality owned electric distribution systems under the 2013-2017 PBR plan.

Applicable Legislative Provisions

The majority of the submissions in this proceeding concerned the acquisition of distribution systems owned by REAs and municipalities by electric distribution utilities. Section 30 of the Hydro and Electric Energy Act provides that no person shall discontinue the operation of an electric distribution system without authorization from the AUC to do so.

Pursuant to the Electric Utilities Act, the AUC must ensure that the rates charged by a distribution utility are, amongst other things, just and reasonable and not unduly preferential, arbitrary or unjustly discriminatory. The AUC must also establish rates that provide an electric distribution utility with a reasonable opportunity to recover its prudent costs of providing service to its customers, including a fair return.

Basis to Distinguish Between REAs and Municipally Owned Electric Distribution Systems

The AUC found no sufficient legislative or principled basis for differentiating between the purchase of a REA from the purchase of a municipally owned electric distribution system for the purposes of funding under the 2013-2017 or the 2018-2022 PBR plan.

Rate Treatment of Acquisition Costs for Municipally Owned Electric Distribution System Under the 2013-2017 PBR Plan

The AUC accepted that at the time of the Crowsnest Pass transaction, which the AUC approved in Decision 21980-D01-2016, FortisAlberta Inc. (“Fortis”) did not anticipate that the costs associated with the purchase of a municipally owned system would be treated differently for ratemaking purposes than the costs associated with the purchase of a REA. The AUC found this was a reasonable expectation, noting that it was consistent with the AUC’s own determination in this decision that there is no sufficient legislative or principled basis upon which to distinguish between the acquisition of an REA distribution system and a municipally owned distribution system, for rate treatment purposes under PBR.

The AUC also accepted that Fortis’ expectation that the costs of the Crowsnest Pass system acquisition would be eligible for a Y factor adjustment if the transaction was ultimately approved and the costs of the acquisition were determined to be prudent. A Y factor adjustment is a cost adjustment that must be approved by the AUC regarding costs incurred as a result of AUC-directed acquisitions. The AUC viewed the approvals issued in Proceeding 21785 as an AUC direction to Fortis to acquire the Crowsnest Pass system. The costs paid for that system were prudent. Therefore, Fortis would be eligible for a Y factor adjustment.

Rate Treatment of Acquisition Costs for REAs, Gas Co-operatives and Municipally Owned Electric Distribution Systems Under the 2018-2022 PBR Plan.

Rate Treatment of Acquisition Costs for Distribution Systems Under the 2018-2022 PBR Plan

The AUC disagreed with Fortis’ position that the presence of an AUC direction should not be determinative of the associated rate treatment. An AUC direction remains required in order for the costs associated with the acquisitions that are the subject of this proceeding to qualify for a Y factor adjustment. That said, an application regarding the prudence of the purchase price and an application for a Y factor adjustment will no longer typically be required as these costs will be managed by the distribution utilities within the revenue provided under the 2018-2022 PBR plan and without additional regulatory scrutiny from the AUC for the duration of the existing PBR plan.

The Role of Q Factor in the Acquisition of Electric Distribution Systems or Assets

In the 2018-2022 PBR plan, the AUC continued its practice from the prior PBR term of designating the percentage change in forecast billing determinants in any given year, as a Q factor.

In its evidence, EQUS REA Ltd. explained that a distribution utility can incorporate effects of customer increases, resulting from the acquisition of an REA or municipally owned distribution system, by way of an adjustment of the Q factor.

The AUC found it was unnecessary to adjudicate the issue of whether changes to the Q factor provide an adequate source of funding for acquisitions. The AUC stated that Q factor is one component of the PBR scheme within which distribution utilities may manage voluntary, freely negotiated acquisitions going forward.

Basis to Distinguish Between REAs, Municipal Electric Distribution Systems and Gas Distribution Systems

The AUC found that insufficient evidence was provided to enable it to consider adequately the rate treatment of gas distribution system acquisitions and whether a distinction from electrical distribution system acquisitions is warranted.

Rate Treatment for the Acquisition of the Fort Macleod System

The AUC found that if the necessary approvals are issued in Proceeding 23702, the AUC would treat those approvals as the basis for an AUC direction such that the prudent costs determined in Proceeding 23972 will be eligible for a Y factor adjustment.

Streamlined Regulatory Review Process

The AUC found that if compelling circumstances are asserted and accepted by the AUC as justification for an AUC-directed acquisition, the AUC will assess any related prudency issues and rate treatment requests on a case-by-case basis. Overall, this should result in greater rate certainty, a reduction of regulatory burden, and a streamlining of the AUC’s approval process for distribution system acquisitions.

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